Global shift to more structured remuneration practices expected in next five years

Following a prolonged period of relatively anemic growth since the financial crisis, the global regulated funds industry is optimistic, possibly exuberant, expecting annual net new money growth of 9% for the next five years, according to EY’s Global regulated funds survey 2014. North American and European managers expect 10% annual growth, whereas Latin America and Asia managers’ expectations are slightly more cautious at 7%.

Mike Lee, Global Wealth & Asset Management Leader at EY, comments:

“The regulated fund industry is united in expecting near double digit growth for the next five years. When you recognize that relatively recent net new money growth rates for the overall industry have been in the range of 3% -5%, it’s clear that managers of regulated funds are feeling pretty bullish. To hit this growth rate, managers are looking to tap into investors’ search for yield in the on-going low interest rate environment. Development of solutions-based products and refocusing on their core actively managed funds are going to be the big bets over the next five years.”

The survey respondents represent approximately 30% of total global assets under management in regulated funds (collective investment schemes regulated for sale to the public, i.e. RICs or UCITS). Forty-two managers of regulated funds across North America, Europe, select Latin American markets and Asia were interviewed.

Significantly more managers expect growth to come from increasing their penetration in current markets (54%), than from taking their existing products into new markets (22%). Whereas managers in Europe are more likely to see geographic expansion as an opportunity, managers in North America and Asia are more likely to seek growth from adding distribution channels.

When asked which products they expect to drive growth, managers rank actively managed equity or fixed income funds at the top; 59% said actively managed funds had the most potential to drive growth and 90% ranked it in the top three. However, solutions-based products come a close second, with 80% of managers ranking it in their top three drivers of growth.

Matt Forstenhausler, EY Americas Regulated Funds Leader, says:

“Managers still see growth potential in their existing products but many are looking to solutions-based products as additional sources of growth. As direct-to-consumer looms large on the horizon, managers are focusing on the competitive advantage that can be gained in their existing markets if they can develop products that play to the expectations of customers and their desired outcomes, such as absolute return strategies, lifestyle products and guaranteed capital products. In today’s low interest environment if managers can create and successfully market products that will outperform traditional savings products, they stand to gain meaningful market share.”

Most regulated fund managers are targeting growth from a combination of retail and institutional clients. Growth could, therefore, be hampered by the fact that roughly 60% of managers believe that retail investors have a relatively low awareness and understanding of their products. This is particularly true of smaller managers, nearly three quarters of whom say retail investors have a relatively low understanding of their products.

The level of awareness or understanding of investment products by European retail investors lags global levels significantly. No European manager was prepared to say that investors had a relatively high understanding of products, compared to 55% in North America and 50% in Asia and Latin America.

“Given the importance of retail investors as a customer base, this presents a significant challenge for manager’s growth aspirations, especially for smaller managers who don’t have such large marketing budgets,” says Michael Fergusson, EY EMEIA Regulated Funds Leader.

Sixty-three per cent of managers believe that social media will influence product and distribution strategies in five years, although managers in Europe and Asia are more bullish about this than those in North America.

“Managers are hoping that social media will help to develop investor knowledge as well as brand and product awareness among the retail investor audience. However, in markets like Europe, the shape of the distribution model means that the ultimate investor relationship is further down the value chain: social media may help, but it is not going to solve the entire problem of how engaged and well-informed European retail investors are,” Ferguson adds.

Global shift to more ‘structured’ remuneration practices expected in the next five years

The survey results show a trend towards remuneration practices which more closely align the interest of managers with their investors across the industry. The EU regulatory agenda is influencing European managers’ pay practices; 56% of European managers say regulatory changes had the greatest impact on their compensation structure or methodology, versus just 5% of North American managers and 13% of managers in Asia and Latin America.

“Although currently, it is European managers who see their remuneration as being strongly affected by regulation, UCITS V and AIFMD are not just a European issue,” says Mike Lee. “Managers in other jurisdictions need to understand the extraterritorial effects of the regulations.”

Most managers employ multiple compensation models. All European managers require at least part of compensation to be deferred, in comparison to 55% of North American managers. However, within the next five years, 80% of managers globally expect to partially defer compensation.

European-based managers are currently less likely to use equity as a component of compensation than their North American counterparts. However, as UCITS V and AIFMD are implemented, European managers expect to use equity or co-investment arrangements.

It is surprising that nearly 25% of managers say that bonuses are awarded on an entirely discretionary basis, and, given UCITS V guidelines, that this applies to 33% of European managers. 65% of managers award at least some discretionary compensation, and more than half the bonus is discretionary for 40% of managers.

For investment professionals specifically, over two-thirds of managers believe that more than 50% of their compensation should be performance based, but currently just 40% of managers tie 50% of these employees’ total compensation to product performance.

“It is clear that the trend is towards more structured remuneration practices that result in greater alignment between the interests of managers with investors. While acknowledging the desire for some level of flexibility and discretion, the current regulatory environment and investor sentiment looks like it is driving a more formulaic and structured approach for a greater proportion of compensation in the future,” concludes Lee.

-Ends-

Notes to editors

About the survey 42 managers of regulated funds (collective investment schemes regulated for sale to the public, i.e. RICs or UCITS) in North America, Europe, select Latin American markets and Asia, were interviewed between February and March 2014. The respondents represent approximately 30% of global assets under management in regulated funds. The full survey will be launched online after Fund Forum. Please look for the link to the survey online at our Global Wealth and Asset management homepage.

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.